MNI INTERVIEW: BOE Should Unwind QE Early, Says Ex-Deputy Bean

The Bank of England should make an early start to unwinding quantitative easing, and begin by ceasing reinvestments, former Deputy Governor Charles Bean, now a top official at the Office for Budget Responsibility, told MNI.

The Bank is reviewing its pre-Covid strategy of only unwinding QE after hiking rates from their current 0.1% to 1.5%, which will include weighing the relative importance of asset purchases in supporting both financial stability and the broader economy. It would be appropriate for the BOE to decide to reduce the stock of gilts accumulated since last March, Bean said in an interview.

"I think that makes sense, to the extent that you think a good chunk of those were actually taken on in the Bank's role as a market maker of last resort to stabilise financial markets," Bean said.

"It is going to take a long time to unwind all the assets that it bought and personally I think it is sensible even if you don't get into active sales at least to move to a world where you allow maturing gilts just to run-off naturally, organic run-off of the stock," he said, adding that sales of bonds could come later.

The BOE could be flexible in its approach to ending re-investment, he said, to avoid prompting market volatility when large holdings of particular gilts come due.

"In so far as you have some lumpy stuff in there might well be a case for doing something to help the market side," Bean said.

RATES SENSITIVITY

In its Budget literature Wednesday, the OBR, produced some striking analysis of how QE has increased the sensitivity of UK public finances to rising interest rates.

The mean maturity of gilts excluding BOE purchases is 15 years, and the median is 11 years, but including BOE purchases it is four years. The average maturity of UK debt shrink to just one year if T-Bills and other short-term products are included.

"The bottom line from that is that a rise in interest rates transmits through much more quickly than you would think if all you did was look at the mean maturity of the gilts that had been issued," Bean said.

Responsibility for the vulnerability of the public finances lies with the Treasury, which ultimately could refuse to sanction more QE, he noted, adding that the stage is set for friction on unwind.

"It is not just the Bank of England, it is all central banks that have been making big asset purchases, the ECB, the Fed, even more the BOJ. There is more likely to be friction between the fiscal authorities and the monetary authorities in the exit phase," Bean said.